Bellatrix Exploration Ltd. BUY Target Price $14

BXE : TSX : C$6.88
BXE : NYSE
BUY 
Target: C$14.00

COMPANY DESCRIPTION:
Bellatrix Exploration is an intermediate sized exploration
and production company with operations in Western
Canada primarily focused on multi-zone opportunities in
west central Alberta.
All amounts in C$ unless otherwise noted.

Energy — Oil and Gas, Exploration and Production
ADDITIONAL JV FUNDING BUT NOT SPENDING UNTIL 2016
Investment recommendation
Bellatrix announced another Joint Venture transaction with its existing
partner Grafton for $250 million. We view the announcement positively
in the context that it 1) reconfirms BXE’s existing JV partner is content
with its partnership and looking to expand the relationship, 2) provides
additional promoted capital with which to anchor production and cash
flow growth in 2016 through 2018, and 3) although pro-rata terms were
similar to its prior JV transactions, the working interest reduction in this
deal provides higher working interest volumes (net to BXE) from this
future well stream, which we believe fits better into its future growth
and infrastructure plans. Our BUY recommendation and C$14.00 target
are unchanged based on 1.0x NAV 6.0x 2015E EV/DACF.
Investment highlights
Earn in terms similar to previous JV transaction with Grafton. The
announced before payout earn in terms of this transaction (50% to earn
33%) are essentially in line with its previous terms (82% to earn 54%).
Additionally, the overriding royalty option (10.67%) in relation to the
33% before payout is essentially the same as the 17.5% on 54%. On a
first-year basis, we see a ~34% capital efficiency improvement from its
wells using JV promoted capital.
Partner spend bolsters the long-term plan but no impact to our financial
forecasts. Given the capital is planned for 2016+, we have made no
adjustments to our estimates at this time. However, in our view, the JV
provides further promoted capital that should help bolster growth upon
expected completion of its Phase 1 and 2 gas plant projects.

Valuation

Bellatrix trades at a 0.5x multiple to NAV, 3.6x EV/DACF, and $35,100
per BOEPD based on our 2015 estimates; a substantial discount to its
peer group at 0.8x NAV, 7.1x EV/DACF, and $68,400/BOEPD.

Bellatrix Exploration Ltd Update BUY Target Price $ 14

BXE : TSX : C$7.55
BXE : NYSE
BUY 
Target: C$14.00

COMPANY DESCRIPTION:
Bellatrix Exploration is an intermediate sized exploration
and production company with operations in Western
Canada primarily focused on multi-zone opportunities in
west central Alberta.
All amounts in C$ unless otherwise noted.

Third Party  CONSTRAINTS
Energy — Oil and Gas, Exploration and Production

Investment recommendation
Bellatrix provided a brief operational update in which it highlighted two
unexpected plant turnarounds anticipated to impact corporate
production in late September. Although disappointing from a near-term
perspective; the continued effect from third-party facility impacts clearly
supports the company’s decision to construct its deep cut plant at Alder
Flats in 2015. We have revised our near-term production estimates
modestly to reflect the expected downtime in September and have taken
a slightly more cautious view in 2015. Given the reduced forecast, we
have modestly trimmed our target to C$14.00 and maintain a BUY
rating. Our fundamental view on the stock remains unchanged and with
a forecast 85% return to target, we see significant upside potential in the
stock. Our target price is based on 0.9x NAV and a 6.0x 2015E EV/DACF
multiple.
Investment highlights
Q3/14 volumes slightly lower. BXE has guided towards a Q3/14 average
of ~40.5 mboe/d, versus previous expectations in the 41.5 mboe/d
range. Our revised forecasts capture this update and maintain an
outlook where BXE reaches 48,000 boe/d by year end, which is
contingent on tie-ins to third-party facilities expected in Nov/Dec.
Stock significantly oversold at current levels. Since May 7, the stock has
underperformed the Energy Index by ~36%, largely as a result of
temporary operational challenges. At current strip pricing and even
assuming a downside case where production volumes average 5% below
our forecasts, implied valuation remains extremely compelling at 4.4x.
Valuation
Bellatrix trades at a 0.5x multiple to NAV, 3.6x EV/DACF, and $35,100
per BOEPD based on our 2015 estimates; a substantial discount to its peer group at 0.8x NAV, 7.1x EV/DACF, and $68,400/BOEPD.

Donnycreek Energy Inc. SPECULATIVE BUY

DCK : TSX-V : C$2.18 SPECULATIVE BUY 
Target: C$4.00
COMPANY DESCRIPTION:

Donnycreek is a junior pure play Montney exploration and
development company with assets in Alberta’s Deep
Basin. Donnycreek trades under the symbol “DCK” on the
TSX venture exchange.
All amounts in C$ unless otherwise noted.

Investment recommendation
Donnycreek released a brief operational update this morning on its
operations at Kakwa. The wells on the company’s three well Montney
pad (the company’s first 1.5 mile horizontals) have been successfully
completed and tested, however no test rates were provided with the
release. The company also announced a plant turn-around at Kakwa,
which will shut in production from the block for ~16 days in September,
and plans to expand the plant on the block from 15mmcf/d to 30
mmcf/d in the spring of 2015.
In our view, a fairly neutral release from the company; however, given
the delays in bringing on production at Kakwa, we have lowered our
production estimates for 2014 . Trading at just 3.1x 2015E
EV/DACF and 0.5x Base NAV (lowest NAV multiple in our coverage
universe), we continue to believe DCK is extremely undervalued relative
to its peers.
We continue to rate the stock a Speculative Buy, and look to November
for IP30 rates on the 3 recently completed 1.5 mile Hz’s (in addition to
the large production bump)as significant potential catalysts for the stock.
Highlights from the release
 Kakwa 3 well pad. DCK announced that all three 50% working
interest wells from the company’s first three well pads have been
completed and flow tested . These wells were drilled with
horizontal lengths of 1,900m, which is longer than wells previously
drilled on this acreage. The wells are expected to come on
production in October.
 Facility expansion. Donnycreek and its partners are currently
designing an expansion for its 16-7 facility to double the throughput
capacity to 30 mmcf/d of natural gas and associated liquids. DCK
and its partners plan to start-up the expansion by spring 2015.

Crew Energy Inc.

CR : TSX : C$9.66 BUY 
Target: C$15.00

COMPANY DESCRIPTION:
Crew Energy is an intermediate oil and gas company with
a large portfolio of exploration and development
opportunities in western Canada. The company has a
two-pronged approach to corporate development,
supplementing organic growth with strategic acquisitions

Energy — Oil and Gas, Exploration and Production
GROUNDBIRCH EMERGING
Investment recommendation

Crew released second quarter results which generally met expectations
on production and cash flow. More importantly, its operational update
contained early stage but encouraging results from its first two
horizontal wells at Groundbirch, and with further expected news-flow in
H2/14 (Tower & Attachie results and potential A&D activity), we believe
the stock will continue to garner investor interest. We are maintaining
our BUY rating and C$15.00 target price based on an unchanged 1.0x
multiple to NAV and a 7.5x 2015E EV/DACF multiple.
Investment highlights
Q2 in line. Second quarter production averaged 27,200 boe/d in line
with CG/consensus of 27,198/26,637 boe/d. Operating CFPS of $0.39
met our $0.39 estimate and consensus of $0.40.
Early and encouraging Groundbirch results. Crew provided early stage
results from its two recently completed wells (still cleaning up).
Management indicated that the wells are flowing at 4.5 MMcf/d (after 10
days) and 3.5 MMcf/d (after 14 days) and are in the over-pressured
window of the Montney (1.3 to 1.4 times normal pressure). We believe
these results met management’s expectations.
Expressions of interest to purchase Princess have been received. Crew
has received expressions of interest for its Princess property but
cautioned a sale may or may not be consummated. Its commentary
suggested that the received offers would result in an after tax
(accounting) loss on the property of ~$200 to $250 million (based on
book value, which can’t be estimated from our perspective). We believe
a disposition of Princess in the $150 million range would be viewed
positively by the market.

Valuation
Crew currently trades at a 0.7x multiple to CNAV, 5.3x EV/DACF
multiple, and $49,200/BOEPD based on our 2015 estimates, versus peer
group averages of 0.8x CNAV, 6.2x EV/DACF, and $78,200/BOEPD

Pengrowth Energy Corporation

PGF : TSX : C$6.82
PGH : NYSE
BUY 
Target: C$8.75

COMPANY DESCRIPTION:
Pengrowth Energy Corporation is an intermediate, dividend paying
E&P focused in the Western Canadian Sedimentary Basin.
Pengrowth is listed on the TSX & NYSE under the symbols “PGF”
and “PGH” respectively.
All amounts in C$ unless otherwise noted

Energy — Oil and Gas, Exploration and Production
SECURING MARKET ACCESS
Investment recommendation
Pengrowth released second-quarter results which solidly beat on
production and matched cash flow expectations. Key highlights of its
release include 1) the announced transportation services agreement
with Husky Energy to gain market access for its Lindbergh bitumen
volumes, 2) it has spent/committed 90% of costs on Phase I, 3) it
remains on time/budget at Lindbergh and 2014 guidance was reiterated,
and 4) results from its Cardium program continue to improve. We
continue to recommend the stock for an attractive dividend yield, solid
pilot results at Lindbergh, and a meaningful CFPS growth profile. Our
BUY rating and C$8.75 target price remain unchanged based 0.9x NAV
and a 2015E EV/DACF multiple of 8.2 times.
Investment highlights
Q2 in line. Production of 73,823 boe/d solidly beat CG/consensus of
71,735/72,236 boe/d. CFPS of $0.23 generally met our estimate of
$0.23 and consensus of $0.24. Full year 2014 guidance was maintained
except for a slight uptick in G&A expenses.
Securing market access. It announced a transportation services
agreement with Husky Energy (HSE:TSX, BUY rated covered by Phil
Skolnick) which accesses its Alberta Gathering System and includes a 10
year take-or-pay provision (with option for future growth at Lindbergh).
Pengrowth will develop a 15 km pipeline (and meter station) in Q2/15 to
facilitate the tie-in, the cost of which was included in its original budget
for Phase I. This agreement allows PGF numerous market access
options at Hardisty including rail and connectivity to export its bitumen
(WCS type pricing) along several key export pipelines.

Valuation
Pengrowth currently trades at a 0.7x multiple to CNAV, 7.1x EV/DACF
multiple, and $75,100/BOEPD based on our 2015 estimates, versus peer
group averages of 0.8x CNAV, 6.2x EV/DACF, and $78,200/BOEPD.

Suncor Energy

SU : TSX : C$42.60
SU : NYSE
BUY 
Target: C$50.00

Energy — Senior E&Ps/Integrateds
SCREAMING FOR VENGEANCE!
We believe there were four very important key takeaways from SU’s Q1
release and associated conference call:
1. Operational reliability for SU remains strong. The company reached an
SCO production record of 312 MBbl/d in Q1/14, which included a 21%
increase in sweet production compared to Q1/13. In addition, refinery
utilization has increased from 92% in 2011 to 96% this quarter. This
should help further re-rate shares, in our view.
2. SU is realizing the cash flow uptick from railing Western Canadian light
oil to its Montreal refinery. We believe this led the company to beat
market expectations; and will likely lead to increases in Sell Side
estimates. It also helped to demonstrate the free cash flow potential of
this company (SU generated about $1.4 billion in Q1 alone). Expect
more benefits once Line 9 reversal commences operations.
3. The company disclosed significant uptick to realized prices and
netbacks when selling dilbit blend in PADD III (USGC) as opposed to
PADD II. To that end, SU stated it realized an $8/Bbl net of
transportation uptick by selling in PADD III as opposed to PADD II. This
is a key confirmation of our heavy oil thesis. The best read-through on
this, in our view, is MEG Energy (MEG-T:$40.10|BUY )
4. Further confirmation around the willingness to export Canadian crudes
beyond the U.S. To that end, management stated on SU’s Q1 call that it
will look at opportunities to ship some volumes offshore that make their
way down the Keystone southern leg. As discussed in our April 21st
report “Q2 Global Energy Themes”, we believe a consortium is building
up in Canada to make the country a major exporter of oil beyond the
U.S.
Bottom line: The first two points are positives for SU; and reasons why we
reiterate our BUY rating and are raising our EPS/CFPS estimates and our
target by $1 to $50. The remaining two points are key to our bullish view on
Canada as we continue to believe they will lead to Canadian crudes being
linked to global prices; and thus resulting in a re-rating of the sector.

Pine Cliff Energy Ltd. BUY

PNE : TSX-V : C$1.42

BUY 
Target: C$2.25

COMPANY DESCRIPTION:
Pine Cliff Energy Ltd. is a junior oil and gas producer
focused on dry natural gas, with assets in Alberta. Pine
Cliff trades on the TSX Venture under the symbol “PNE”.

All amounts in C$ unless otherwise noted.

Energy — Oil and Gas, Exploration and Production
TIME TO GAS UP
Investment recommendation
We are initiating coverage of Pine Cliff Energy with a BUY rating and a
C$2.25 target price. PNE has had a great run over the last year,
increasing its share price by ~60%, but in our view, this is just the
beginning. Driven by accretive acquisitions and a rebounding gas price,
we expect this stock to go materially higher over the coming year, as
reflected in our forecast return of 58%. Our valuation is NAV based and
maps to a 2014E EV/DACF of 14.7x.
Why we believe this stock is set to outperform:
 Gas Leverage to the Extreme. Simply the best way to gain
exposure to rising gas prices, in our view, given a production
base that is 95% dry gas with no hedging in place. As
highlighted in Exhibits 1 and 2, PNE is the most levered
company to natural gas prices in our coverage universe, with a
$1 increase in AECO prices driving an increase to estimated
CFPS of ~40% and an increase to NAV of over 40%. In our view,
if you want to own gas, you want to own Pine Cliff.
 Acquisitions to drive performance. PNE has taken a contrarian
approach by purchasing dry gas while others chase oil and
NGLs. The last two significant acquisitions by the company over
the last year have resulted in share price bumps of 46% and
36%, respectively. PNE currently trades at 9.0x 2014E
EV/DACF, but as we walk through in Exhibit 3, if the company
were to buy $100 million in assets at 5x cash flow, this multiple
would be just 6.8x 2015E estimates. Use a 5$ AECO price and
it’s at just 5.4x.
 Our Call? Give this management team your money. George Fink
is well respected as an excellent steward of capital, and for
good reason. Early investors in Bonterra Energy (BNE: TSX: Not
Covered) have been handsomely rewarded over the last 16
years, with a CAGR of 45% since 1998. In addition to the energy
space, Mr. Fink has also had success in mining, where at
Comaplex Minerals he provided investors with a CAGR of 21%
over a 15 yeear period.
Our C$2.25 target price is based in part on our assumption that the
company will be successful in completing $150 million in acquisitions
over the next year and post transaction its multiple will return to the
natural gas peer group average of 9.0x EV/DACF

Peyto Exploration & Development Corp.

Personal note : my daughters went to college on the money I made tracking Peyto from $ 8 to $30

PEY

TSX : C$34.92 
HOLD  Target: C$39.00

 COMPANY DESCRIPTION: Peyto Exploration is a low-cost gas-weighted dividend paying intermediate E&P focused on horizontal drilling in the Deep Basin of Alberta, Canada with highly contiguous land and multi-zone gas potential.
All amounts in C$ unless otherwise noted

Oil and Gas, Exploration and Production GOING LONGER IN 2014 
Investment recommendation

Peyto announced fourth quarter results which were largely in line given pre- announced production and capital expenditures. Its infrastructure remains highly utilized and requires further expansions this year to accommodate growth; Peyto remains poised to do that given ~100 MMcf/d of capacity expansions planned this year. It has noticeably moved to longer lateral horizontals given licenses to date and we see the potential for a 10% improvement in IRR and capital efficiencies from ERH development. Peyto remains one of the highest quality natural gas producers in the Basin and a go-to name for exposure. We maintain our HOLD recommendation and C$39.00 target; however, we will continue to monitor the share price for any improvement in valuation (all other factor being equal).
Investment highlights Envision little change to 2014 budget despite firmer gas prices. Despite higher natural gas prices, we see a low probability of any meaningful increase to its $600 million budget given lead time and infrastructure planning. Additionally, PEY has hedged ~55% of 2014 production at ~C$3.70/Mcf, so it has a relatively modest upside participation.
Going longer in 2014.  Peyto has noticeably shifted its licensing and 2014 well program to extended reach horizontal (ERH) wells. Its average well length in 2013 increased by 7% or 100 meters YoY; we see the potential for a material increase in 2014. It is still early in terms of results and costs for Peyto-operated ERH wells; however, we believe ERH wells could provide a +10% improvement in capital efficiency and +10% uplift in IRR per well, which are not captured in current forecasts.
Valuation Peyto currently trades at a 1.1x multiple to CNAV, 11.3x EV/DACF multiple, and $83,400/BOEPD based on our 2014 estimates, versus peer group averages of 0.8x CNAV, 8.1x EV/DACF, and $77,000/BO

Bankers Petroleum Ltd

BNK : TSX : C$4.04
BNK : AIM
BUY 
Target: C$6.00

COMPANY DESCRIPTION:
Bankers’ operations are focused on developing heavy oil
assets in Albania, which include rights to develop the
Patos-Marinza and Kucova heavy oil fields (both 100%
interest) during the 25-year licence period. Bankers has
an opportunity to unlock immense potential from its 7.7
billion barrels oil-in-place Patos-Marinza field by applying
modern techniques to optimize recovery factors, expand
its resource base, and increase production.
All amounts in US$ unless otherwise noted.

Energy — Oil and Gas, Exploration and Production
FOCUSED ON BOTTOM LINE IN 2014
Investment recommendation
Bankers Petroleum announced its 2014 budget, projecting capital
expenditures of $313 million and production growth of 10-15% over
2013. The budget reflects a 27% increase over the 2013E program and
is the largest in the company’s history. Approximately 90% of the budget
will be directed toward development work, while the remainder is
earmarked for enhanced recovery initiatives and new ventures like
horizontal wells at Kuçova and 3D seismic on Block F. We have revised
our estimates to reflect updated guidance, resulting in a 2014E NAV of
C$7.05 (from C$7.15). With numerous cost-cutting initiatives planned
for the coming year, we believe 2014E operating funds could surprise to
the upside (although we have not yet incorporated a reduction in
operating costs). With a 12-month target price of C$6.00/share and a
potential return to target of 47%, we reiterate our BUY recommendation.
Investment highlights
 The company has doubled its budget for enhanced recovery
initiatives, which if successful, should generate lower decline rates
and a higher overall recovery factor.
 We expect that operating funds will outpace capital expenditures by
~10% based on a 2014 Brent price of $104/bbl. At $100/bbl, we
forecast a balanced budget.
Valuation
We use a DCF model to value Bankers. Based on our 2014E estimates
Bankers is trading at a multiple of 0.57x our risked NAV, 2.9x EV/DACF
and $46,840 per flowing barrel. This is significantly below the domestic
junior averages of 0.8x NAV, 5.6x EV/DACF, and $73,200 per flowing
barrel, despite Bankers’ better-than-average netbacks and favourable
debt levels. With a 12-month target of C$6.00 and a potential return of
49%, we reiterate our BUY recommendation.

Canadian Natural Resources Ltd. BUY

CNQ : TSX : C$32.61
CNQ : NYSE
BUY 
Target: C$42.00

COMPANY DESCRIPTION:
Canadian Natural is one of the largest independent crude oil and natural gas producers in the world with a diversified and balanced asset base of natural gas, heavy oil, oil sands and light oil.
All amounts in C$ unless otherwise noted.

Energy — Oil and Gas, Exploration and Production
DIVIDEND HIKE SHOWS CONFIDENCE IN PRIMROSE AND HORIZON EXPANSION SPENDING CYCLE; ADDING TO FOCUS LIST
We are raising our target price by $3 to $42  on the heels of its Q3 release due to the following:
We believe the large dividend raise demonstrates three things: a) management’s confidence that the Primrose issue is just mechanical; b) where the company is in the spending cycle on the Horizon expansion – i.e., the company sees a path to being in harvest mode and thus ever increasing free cash flow (Figure 1); and c) the benefit of long life oil sands projects.
The company is now changing its tune with respect to acquisitions. In the past management used to highlight how free cash flow would be used to make acquisitions, which would in turn create an overhang on the stock. Yesterday, however, when asked, management stated it has no need to do any acquisitions given there are no gaps in the asset base, thus giving investors greater hope of further dividend increases.
We continue to believe the current WCS differential blow out is temporary and much different than this time last year. While differentials are about as wide as they were a year ago, the difference this time is that there is a clear line of site on infrastructure improvements in less than a year’s time owing to increased coker, pipeline, and rail capacity. As such, CNQ will be the go-to stock given roughly 40% of its production is heavy oil and it lacks downstream operations, which would act as a partial offset. Additionally, it is essentially a household name for non-Canadian investors (the incremental buyer) on this theme given its market cap and liquidity.
Cheapest in the group. At 4.8x 2014E DACF, CNQ is the cheapest among the Senior E&P/Integrateds in our coverage universe, which on average are at 6.1x.

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